The mis-selling scandal that rocked the payment protection insurance market may have lessened the appetite for this controversial product. But if you understand what it's for when you buy it, PPI can still be useful.
Here, we set out the basics of payment protection insurance, including everything you need to know before you buy and some policies worth considering. If you think you were mis-sold PPI, see our Reclaim PPI For Free guide.
Loan payment protection insurance: The basics
It's a controversial policy, but payment protection insurance (PPI) is seen by many as a welcome comfort. You pay a monthly premium, and then if you're unable to work due to an accident, redundancy or sickness, your loan repayments are covered for up to two years.
You can get PPI for mortgages, loan and credit cards. This guide deals with loan PPI. For more on mortgage PPI, see our MPPI guide.
Payment protection insurance isn't a bad product in itself. But it's been widely mis-sold, leaving many paying hundreds for potentially worthless cover. Sales staff dressed as advisers were given huge incentives to sell PPI whenever possible.
Following the mis-selling scandal, providers have become increasingly wary of using the "payment protection insurance" label. But any product which offers loan repayments for a fixed term owing to accident, sickness or unemployment - such as loan protection and short term income protection - will be roughly the same product.
What are the main types of loan payment protection insurance?
There are three types of loan PPI policy. Unemployment-only, accident and sickness only (AS) and accident, sickness and unemployment (ASU).
Unemployment-only will cover you if you're made redundant (you also need to be registered with the Government as unemployed and actively seeking work).
Accident and sickness will protect you against accidents and long-term illness (this will have to be certified by a doctor) while accident, sickness and unemployment will protect you against all three.
When does the policy pay out?
Policies typically come with an excess period (sometimes called a deferred period).
A deferred period is the time you'll have to wait before you start receiving payment for a claim. It's usually 30 days but it can go up to 180 days. So if you have a 30-day deferred period, you'll only start getting monthly payments 30 days after you stop working. You can also get policies which backdate your payments from the point of claim - known as back-to-day-one policies.
Because you'll have to wait at least 30 days from when you stop working before you'll get any payments, it's sensible to have at least two months' loan repayments stashed away in savings.
What are the typical PPI exclusions?
There are a number of exclusions to loan PPI policies. These are the most common…
Redundancy was foreseeable
If there is a "foreseeability of redundancy" – for example, you've been told or are aware your job is under consultation at the time of buying a policy – it's likely you won’t be able to claim. Be careful, as this may also be the case if you know some jobs in your company may be lost, or even in circumstances where your place of work is known to be in financial trouble.
If you take voluntary redundancy, you won't be able to claim on your loan PPI policy. There's one exception – if you're leaving to become a full-time carer for a seriously ill loved one, you'll be able to claim. To be sure, check the policy wording carefully.
Many PPI policies exclude the self-employed, or place them under massive restrictions. For example, you may be covered for accident and sickness, but you won't be if you run out of work. If you’re self-employed, you should check the details of a PPI policy very carefully before taking it out.
If you have to stop working because of a condition you had before you took out your policy, you won't be covered. All pre-existing medical conditions have to be disclosed when you buy your policy. You must also keep your insurer informed if you develop a condition during the life of your policy.
There are also usually exclusions if you deliberately injure yourself and can no longer work, or if you're off work for drug and alcohol-related issues. Remember to read your policy carefully for a full list of exclusions.
What are the age and employment restrictions?
Like many insurance products, loan PPI comes with age and employment restrictions. They vary between providers, but most policies only cover people between 18 and 65.
In addition, you must work for at least 16 hours a week. If you're on a temporary contract, you're unlikely to be covered, and you usually have to have been in employment for at least the last six months.
Many policies can cover you if you are self-employed, but you can only claim if you go out of business through no fault of your own, usually involuntary liquidation.
If you're a contracted worker, you may need to have been employed for a certain amount of time, or work a certain number of hours each week, to gain cover.
I'm on benefits. Can I still get cover?
Claiming income-related benefits won't be a hurdle to buying PPI. But if you get an insurance payout, it may affect what you receive from the Government. Check the details of your PPI policy carefully if you're unsure and speak to the Government agency that's offering you support.
How long will a policy pay out for?
Most policies only pay out for 12 months. However, it's now possible to get cover for different periods, from as little as six months to up to two years.
How easy is it to switch policies?
Many PPI policies have deferred periods so, while switching can save you a fortune, it may not be appropriate in every case. Most new policies won't include pre-existing conditions you have when a policy's taken out. If this applies, don't change it but always check that the provider has not imposed any restrictions or conditions at renewal.
What if my insurer goes bust?
PPI providers are covered by the Government’s Financial Services Compensation Scheme. So if they cease to trade, you'll be protected.
The economic times we live in mean you never know which company might be the next to have problems. Fortunately, insurance providers are covered by the government-backed Financial Services Compensation Scheme, meaning if they go into default, you're protected.
The FSCS will usually try to find another provider to take over your policy, or issue a substitute policy. However, if you have any ongoing claims, or need to make a claim before a new insurer is found, the FSCS should ensure these are covered. For full details, read the insurance section of the Savings Safety guide.
Why is PPI so controversial?
PPI itself isn't a bad product. But it's been widely mis-sold by incentivised sales staff. Many were under so much pressure they strayed far from the truth, and much of the insurance cost went on huge commissions. The sellers were often trusted financial institutions. The financial regulator started fining PPI companies in 2006, but a big improvement wasn't seen until 2011.
Some people bought polices that weren't suitable for them. For the self-employed, the unemployment element is often useless, as the benefits were either poor or the self-employed were excluded altogether. Even if you're not self-employed, always read policy terms to check suitability.
There are often specific exclusions that may affect you, or that you weren't told about before you bought the insurance. If you think this applies to you, see the PPI Reclaiming guide to see if you can reclaim the cost of your insurance.
Loan PPI: The buyer's checklist
Before you shell out on PPI, make sure the product's right for you and that you need the protection it offers. Think carefully before you buy and ask yourself - do you really need cover for accident, sickness or unemployment cover?
You may not need loan PPI
Go through this checklist to work out if you actually need a policy:
Are you covered by another policy (such as income protection)?
Do you have savings which would cover any repayments?
Would relatives or friends be able to help you out?
Would your employer offer you any benefits?
If you answer "yes" to any of these, you may not need to take out PPI.
You could save by getting standalone cover
If you want PPI, don't assume you have to get it from your loan provider. A number of companies sell standalone PPI policies. These are much cheaper than lenders' own insurance but can still protect any loans you've taken out. If you're going to do this, make sure you're not double-covered. Uncheck the payment protection box on your loan form, then go direct to one of these online insurers.
You can't get cover for something that has already happened
If there's a "foreseeability of redundancy" – for example, you've been told your job is under consultation – it's likely you won’t be able to claim. This may also be the case if you know some jobs in your company may be lost, or even if your employer is known to be in financial trouble. Your insurer will also want to know about your medical history, so make sure you tell it about any pre-existing conditions. If you don't, your policy could be invalid.
Understand your deferred period
PPI policies won't let you claim from the very start of your policy. Instead, they set a deferred or excess period. This differs by provider. It's usually 30 days, but it can be as long as 180 days. Before you buy, calculate how much of a deferred period you can afford, and, if you can, set some money aside as cover.
In addition, consider adding a "back to day one" element to your policy. This will backdate your payments from the point when you claimed. So if you had a 30-day deferred period with a back-to-day-one policy, you'd start getting payments after 30 days. You'd get two payments, one covering the deferred period and other covering the month that followed it.
Switch your policy with care
Unlike car and home insurance, PPI policyholders have to switch with care. PPI products usually prevent you claiming in the earliest part of the policy so switching could leave you out of pocket if you need to claim within the first few months. Sticking with your currrent provider could avoid this. New policies also won't include conditions you already have when they're taken out.
Step 1: Use comparison sites to find the right cover
There are dozens of different PPI providers. Decide what cover's best for you then use at least one of these comparison sites to scan the market.
MoneySupermarket compares more than 70 products, covering PPI and wider income protection products. It allows you to buy without having to phone individual providers.
Compare The Market
Compare The Market's comparison allows you to compare dozens of products. You can either buy via the comparison site or ask for a call back from your chosen provider from the list.
ActiveQuote provides the quote engine that powers both Confused.com and Gocompare. It allows you to easily select the right protection as well how long you want the policy to last for. But you can't retrieve a quote without giving it your full contact details.
Step 2: Check your policy carefully
Always double-check the policy terms. Once you've found the cheapest quotes, make two important checks.
Double-check the quotes. Click through to the insurance provider's own website to double-check the quotes, as to speed up searches some comparison sites make a few assumptions (see what to check).
Examine the policy's coverage. Check whether it's suitable. If you want back-to-day-one cover, is it included? While you're there, it's worth playing with the policy details to see if you can lower the price further.